10 Bullish Option Spread Strategies

Have an idea of where a stock may be in a month, but don't dare buy it due to fears of the market sinking? Want to short a stock but fear the market may rally? Using option spreads will allow you to take advantage of the upside or downside with minimal risk.

This strategy is what I call the 10%-15% strategy. In terms of the bull call spread, this will hit the lower strike if the stock trades up by 10% within the given time frame, and will expire at maximum profitability if the stock trades up by 15% given the same time frame. Not quite that bullish? No problem, adjust the % range to your desired level, and choose the closest strike prices.

Below are some examples. Depending on where you think the Stock/ETF will be (in terms of dollars) and time frame, you may need to adjust expiration and strike prices accordingly. (All prices based on close price Friday May 15, 2009, and strike prices are the closest prices to the calculated values.) To learn more about trading options, check out my book, and to see similar option strategies click here.

Some Ideas for the Bulls:

Spread Strategy # 1: Buy the Google (GOOG) June $430 Call and sell the June $450 Call. This strategy would cost $170 per contract to open, and if Google can close above $450 at June expiration the profit from this strategy would be $1830 or 1076%. Break even point is Google at $431.70 come June options expiration. Similar strategies can be used for Microsoft (MSFT) and Yahoo (YHOO).

Spread Strategy #2: Buy the Apple (AAPL) June $135 Call and sell the June $140 Call. This strategy could be opened for $75 and will return 567% if AAPL closes at or above $140 a share on June expiration. Break even is $135.75 per share at expiration.

Spread Strategy #3: Buy the Financial SPDR (XLF) June $12 Call and sell the June $13 Call. This could be opened for roughly $30 per contract and has a potential of netting $70 if XLF closes above $13 come June expiration. The return in this case would be over 200%. Break even is XLF at $12.30 per share. Also use similar strategies with other volatile individual financials such as: American Express (AXP), Bank of America (BAC), Bank of NY Mellon (BK), Citigroup (C), Goldman Sachs (GS), JP Morgan (JPM), Morgan Stanley (MS), Wells Fargo (WFC), and the really volatile leveraged financial ETFs such as Proshares Ultra Financials (UYG) and Direxion 3X Financials (FAS).

Spread Strategy #4: Buy the Palm (PALM) June $12 Call and sell the June $13 Call. This strategy can be opened for roughly $25 per contract and if PALM closes at or above $13 at June expiration it will yield $75 profit or 300%. Break even is PALM at $12.25. A similar strategy can be used for Research in Motion (RIMM).

Spread Strategy #5: Buy the United States Oil Fund (USO) June $34 Call and sell the June $36 Call. This strategy can be opened for roughly $35 per contract and if the USO closes at or above $36 at June expiration it will yield $165 profit or 471%. Break even is USO at $34.35. Similar strategy can be used for the double leveraged crude oil ETF (UCO). Other ideas would be looking at oil services such as Exxon Mobil (XOM), and ConocoPhillips (COP). Historically as oil heats up so do the solar stocks, therefore you may want to check out the options on names like: First Solar (FSLR), Evergreen Solar (ESLR), SunPower (SPWRA), and A-Power Energy (APWR).

Spread Strategy #6: Buy the Caterpillar (CAT) June $39 Call and sell the June $41 Call. This strategy can be opened for roughly $45 per contract and if CAT closes at or above $41 come June expiration it will return 344%. Break even point would be Caterpillar at $39.45 per share.

Spread Strategy #7: Buy the Ford (F) June $6 Call and sell the June $7 Call (higher strike actually higher by 27%). This strategy can be opened for roughly $20 per contract and if Ford closes at or above $7 at June expiration it will return 400%. Break even is Ford at $6.20. The lower the price of the stock the more complicated options become. General Motors (GM) is not a good example of a similar strategy, this is because the strikes are in $1 increments and GM stock is at roughly $1.

Spread Strategy #8: Buy the Potash (POT) June $120 Call and sell the June $125 Call. This strategy can be opened for roughly $100 per contract and if POT closes at or above $125 (factoring in a 20.9% chance) at June expiration it will return 400%. Break even is POT at $121 a share. For similar strategies check out the options on Sociedad Quimica (SQM), Terra Nitrogen (TNH), and CF Industries (CF).

Spread Strategy #9: Buy the Diamonds Trust ETF (DIA) June $90 Call and sell the June $94 Call. This strategy can be opened for roughly $31 per contract and if the DIA closes at or above $94 (factoring in a 3.9% chance) at June expiration it will return 1100%+. Break even is DIA at $90.31.

Spread Strategy #10: Buy the SPDR S&P 500 ETF (SPY) June $97 Call and sell the June $102 Call. This strategy can be opened for roughly $40 per contract and if the SPY closes at or above $102 (factoring in a slim chance of 3.7%) at June expiration it will return 1150%. Break even is SPY at $97.40

Above are all examples of Bull Call spreads. To see more strategies like the ones above click here.

Some Ideas for the Bears:

Similar spreads can be used if you are bearish. To do so you would want to buy the put 10% lower and sell the put 15% lower than the current stock price. This will allow you to capture the downside with minimal risk if the individual security takes off to the upside.

Depending on how long you wait to implement these strategies will make a big difference, and each strategy should be fully analyzed before opening any of these spreads.

Disclosure: Long AXP, BAC, CAT, GOOG, GS, PALM, UCO.

Comments

[MrCostello:]

Hey cool article marco thanks for the detailed explanation I just bought your book- thanks

May 17 02:46 PM

[connorport:]

APWR is not a solar stock. They are Wind Energy. My call on APWR would be to buy June $12.50 or $15 calls. Earnings will be beaten severely again on June 1 earnings call and i think we see a run to nearly $17. New contracts and the completion of one of the largest Windturbine Manufacturing plants in China with support and Billions in commitment from the Chinese Govt and Superior involvement by GE i think this stock is set to sail to $30-$40 by the end of 2011 if not sooner.

May 17 08:10 PM

[connorport:]

My opinion is that bears should buy these stocks and sell covered calls on them. If they run then you would chase the stock value upward but if they fall a little you buy back to cover and keep the change to pay for the equity. Wait for a run back up and sell some more covered calls. I think the volatility here and the low stock price is the prime time for this play.

May 17 08:14 PM

[Marco Hickey:]

You are correct. I typed APWR by mistake (I like that stock and often trade it), but intended to type the name of Ascent Solar Technologies (ASTI). Thanks for catching the error!


On May 17 08:10 PM connorport wrote:

> APWR is not a solar stock. They are Wind Energy. My call on APWR
> would be to buy June $12.50 or $15 calls. Earnings will be beaten
> severely again on June 1 earnings call and i think we see a run to
> nearly $17. New contracts and the completion of one of the largest
> Windturbine Manufacturing plants in China with support and Billions
> in commitment from the Chinese Govt and Superior involvement by GE
> i think this stock is set to sail to $30-$40 by the end of 2011 if
> not sooner.

May 17 08:25 PM

[Mike M:]

Why don't you hit the roulette tables in Vegas instead

May 18 08:55 AM

[TCK:]

Emphasis on "Bullish Strategy" as these stocks need to move ANOTHER 15% in a month just to break even.


On May 18 08:55 AM Mike M wrote:

> Why don't you hit the roulette tables in Vegas instead

May 18 09:10 AM

[CoverIsBetter:]

Agree with naysayers here..
There is a reason these Bull Spreads are so cheap to get into, low chance these stocks move up that high that fast in the dog days of summer.
I have tried your strategy so many times only to see the stock trade sideways or down. As a matter of fact, I am holding your Bull Call Spread idea for USO from MAY 12 (seekingalpha.com/artic...)
and losing money on it.

Just saying.. this is a high risk strategy. My covered calls in WFC, BAC, and F are bringing me better sleep at night.

May 18 10:33 AM

[Marco Hickey:]

You can't just jump in on an up day, I always wait for a slight pullback... I am actually up 37% on that spread and trimmed some Friday.


On May 18 10:33 AM CoverIsBetter wrote:

> Agree with naysayers here..
> There is a reason these Bull Spreads are so cheap to get into, low
> chance these stocks move up that high that fast in the dog days of
> summer.
> I have tried your strategy so many times only to see the stock trade
> sideways or down. As a matter of fact, I am holding your Bull Call
> Spread idea for USO from MAY 12 (seekingalpha.com/artic...)
>
> and losing money on it.
>
> Just saying.. this is a high risk strategy. My covered calls in WFC,
> BAC, and F are bringing me better sleep at night.
>

May 18 06:57 PM

[Marco Hickey:]

AAPL strategy could have been traded out of today for a gain of 33% at close. I don't think people should wait until expiration for the calls (or puts) to expire, trade them.

May 18 07:01 PM

[Marco Hickey:]

Traded out of some of my AAPL spread I started before writing this article... Took a 108% profit today.

May 27 02:01 AM

[3DCP:]

Is the calculation on probabilitly of expiring out of the money your formula or are you referencing another data source

May 27 10:04 AM

[Marco Hickey:]

No I am using the probability derived from the Black Scholes model. Most brokerages have an options calculator and allows for probabilities to be easily calculated. Let me know if you have any other questions.


On May 27 10:04 AM 3DCP wrote:

> Is the calculation on probabilitly of expiring out of the money your
> formula or are you referencing another data source

May 27 11:56 AM